“You were put on this earth to achieve your greatest self, to live out your purpose and to do it courageously.” – Steve Marabali


The year has started off well for the equity markets. Last week the equity markets were up between 1% and 2% depending on the Index. As of Wednesday of this week, the markets are also up. This, however, is not the dawn of the market rally back to the previous highs.  Just a reminder, there were three years of head fakes and false rallies in the 2000-2002 bear market. That bear market was down 47% top to bottom for the S&P 500. During that time period, the Nasdaq rallied more than 10% eleven times and four rallies were between 28% and almost 50%.

The equity markets have held steady for the fourth quarter of 2022 after the decline of about 20% or more since January 2022, That decline was primarily due to a valuation decline because of rising interest rates. The second leg down is coming due to a corporate (profits) earnings decline. U.S. corporate profits were +4% in the third quarter of last year. If you take out Energy earnings, profits were actually down -3%. So far even though not many corporations have reported, profits are down -10%. That’s one of the biggest profit’s rate change recessions we’ve seen in recorded history. As you know, when profits go down so do stock prices. Based on the downward trend for the fourth quarter of last year, the profit picture for the first quarter of 2023 will be even worse.

Now let’s talk about the money supply. Think about it this way: When we went through the pandemic, businesses shut down, people were being laid off and the Fed flooded the market with lots of money driving interest rates down. Add in the stimulus money going to just about everyone, inflation shot up. People suddenly had lots of cash burning a hole in their pockets and stuck in their homes with not much else to do but shop online. Unfortunately, due to the pandemic, manufacturing was shut down and supply chains clogged up thus causing prices to escalate.

Now we have just the opposite. Having spent all their cash, consumers are now having to live off their credit cards and the Fed has contracted the money supply. Going back to 1960, there’s only one red number year in that time where annual money supply growth contracted year-over-year and that was 2022.

What does all this mean for the stock market? If the consumer has spent all their money and the Fed has drained a ton of it out of all that was sloshing around, it means that the consumer cannot buy the stuff that companies produce. If companies can’t sell their goods and adding the fact that wages paid to workers have gone up, the only conclusion is that profits will go down. If the Fed continues on this tight money course for the next twelve months or so, we are headed into a deep corporate profit’s recession which again as you know, is not good for stock prices.


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These are Larry Lof’s opinions and not necessarily those of Cambridge, are for informational purposes only and should not be construed or acted upon as individualized investment advice. Past performance is not indicative of future results. Due to our compliance review process, delayed dissemination of this commentary occurs.

The S&P 500 index of stocks compiled by Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. The Index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. Indices mentioned are unmanaged and cannot be invested into directly.

Technical analysis represents an observation of past performance and trend, and past performance and trend are no guarantee of future performance, price, or trend. The price movements within capital markets cannot be guaranteed and always remain uncertain. The allocation discussed herein is not designed based on the individual needs of any one specific client or investor. In other words, it is not a customized strategy designed on the specific financial circumstances of the client. Please consult an advisor to discuss your individual situation before making any investments decision. Investing in securities involves risk of loss. Further, depending on the different types of investments, there may be varying degrees of risk including loss of original principal.


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